It's highly likely that Apple (AAPL) will report its next quarterly results sometime after the July 2012 options expire. That means whether you're bullish or bearish, it's the August option series that's going to be important this earnings cycle.
So are these options cheap or expensive?
Here's a chart that shows mean indexed 30-day, 60-day, and 90-day implied volatility for Apple options going back to the beginning of the year through June 22.
This is basically the range Apple options usually trade in, reaching IV lows in the 20s and highs in the 40s. Also note the drop off in late January and late April when earnings announcements were released.
But mean indexed implied volatility weighted to various expirations doesn't mean much. You have to buy actual options, not the mean weighted kind. So how much do the July options cost vs. the August options?
Here's a look at the actual implied volatility for at-the-money July options vs. August options from May 21 through June 25 -- along with a chart showing the relative IV between the two.
The pattern is clear. The August options, which are the ones most likely to be "in play," are starting to get more and more expensive. I suspect they'll get even more expensive on a relative basis as July's earnings announcement looms, and perhaps moving well into the 40s.
Increasing implied volatility benefits you if you're holding options and they stay reasonably near the money. If, on the other hand, you want to bet on a volatility collapse after earnings, then of course you should probably wait before selling any August options.
Which Way Will Apple Trade?
So what about the stock? What direction should you pick? Last quarter we saw major panic and major euphoria several times before and after the quarterly announcement. The range of 100 points before earnings and close to that after the announcement was an interesting roller coaster ride.
I don't expect the July quarter to be a blockbuster (July quarters usually aren't), but I'd be very comfortable taking bullish positions (selling puts or buying stock) in the 530 to 550 range if the stock returns to those levels. If prior to earnings volatility spikes and the stock moves into the 600s, I'd consider selling some short-term calls in the 650-plus range against existing long positions.
Increasing Interest in Options
Open interest in Apple options seemed to peak back before the last earnings report in April, which at around 3.5 million contracts was the highest ever as far as I can tell.
It's dropped a bit, but I bet it goes up again. That 2.5 million contract ceiling now seems to be a new floor with Apple options some of the most popular on the exchange. (The zig-zag lines that look like saw teeth represent both weekly and monthly option expirations.) That 2.5 million contracts represents the right to buy or sell 250 million shares of stock (or about 25% of the float) should be scary, but remember, for every long there's a corresponding short (possibly hedged with stock).
Still, that's a lot of options. Just consider that those July options expire on July 20. I doubt that Apple will release its earnings until the following week, so that's why August options are becoming more expensive on a relative basis.
Disclosure: I am long AAPL.